UNIT 1INternational Business
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Transcript of UNIT 1INternational Business
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Introduction & Overviewof
International Business
Unit-1
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Contents
Introduction:
Definition
Features of IB
International business Vs domestic business Why international business?
Advantages of IB
Drivers of growth of IB
Modes of IB Theories of Trade
Classical theories
Modern theories
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What is International business?
IB is all commercial transactionsprivate and governmental betweentwo or more countries.
Business activity may involve:
Transfer of goods,services, resources,knowledge, skillsor informationacrossnational boundaries with a view tosatisfying needs of individuals,organizationsand governments.
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Features of IB
International business relates to transactions involving morethan one country.
Scope of international business is very vast. Scope exists toexchange goods
Services (accounting, legal services, healthcare, managementconsultancy, banking, insurance, transportation, tourism)
Transfer of knowledge( technology, innovation, intellectualproperty rights),
Other resources( materials, capital , people) ,
Skills (managerial skills),
Information,
People.
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Why do companies do IB ?
Domestic market saturated.
Increase market size and extend productlife cycle.
To acquire resources.
To minimize risk.
Economies of scale.Enhance your return on invested capital.
Enhance location advantage for suppliers
n customers.
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IB Vs Domestic Business :
When a company operates internationally,foreign conditions are added to domestic onesmaking external environment more diverse n
complex.i. IMMOBILITY OF FACTORS
ii. DIFFERENCES IN NATURAL ENDOWMENTS
iii. DIFFERENT CURRENCIESiv. BALANCE OF PAYMENT PROBLEM
v. MARKET CONDITIONS
vi. PRODUCT MOBILITY
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IB Vs Domestic Business :
vii. HIGH TRANSPORT COST
viii. SHARING OF GAINS OF TRADE
ix. DIFFERENT TRADE POLICIES
x. DIFFERENT ECONOMIC ENVIRONMENT
xi. LINGUISTIC & CULTURAL DIFFERENCES
xii. SPECIFIC PROBLEMS
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ADVANTAGES OF IB
i. MAXIMISATION OF WORLD OUTPUT
ii. INCREASED FACTOR INCOME
iii. CHEAP IMPORTS
iv. PREVENTS MONOMPOLISTIC EXPLOITATIONv. OPTIMISATION OF CONSUMPTION
vi. WIDENS MARKETS
vii. ENCOURAGES INNOVATION
viii. DEVELOPS INFRASTRUCTURE
ix. PROMOTES INTERNATIONAL COOPERATION
x. PROMOTES ECONOMIC DEVELOPMENT
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Reasons for growth ofIB
Rapid increase in communication & expansionof technology.
Liberalization of cross-border movement of trade
& resources. Development of supporting services.
Consumer pressure.
Increase in global competition.
Large number of trading blocs are adding to thepace of IB.
MNCs : locating their subsidiaries in low wage nlow cost countries to lower production costs.
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Modes of IB
Merchandise exports & imports.
Service exports and imports.
Tourism and transportation
Banking , insurance
Turnkey operations
Management contracts
Use of assets: LICENSING &FRANCHISING (Patents, trademarks,copyrights, etc.)
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Modes of IB
INVESTMENTS
Joint venture
Wholly owned subsidiary ( Greenfieldinvestment, acquisition)
Portfolio Investments
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International trade theories
Why should the business firms of onecountry go to another country, when theindustries of that country also produce
goods?
What is the basis of IB?
A number of theories have beendeveloped to explain the basis of IB.
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International trade theories
1500 1600 1700 1800 1900 2000
MERCANTILISM
ABSOLUTE ADVANTAGE
COMPARATIVE ADVANTAGE
FACTOR PROPORTIONS THEORY
INTERNATIONAL PRODUCT LIFE CYCLE THEORY
NATIONAL COMPETITIVE ADVANTAGE
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International trade theories
CLASSICAL TRADE THEORIES
MERCANTILISM
ABSOLUTE ADVANTAGE
COMPARATIVE ADVANTAGE
MODERN TRADE THEORIES
INTERNATIONAL PLC NATIONAL COMPETITIVE ADVANTAGE
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MERCANTILISM
Between 1600 & 1800, most of WesternEurope pursued mercantilism.
What was mercantilism?
Belief that exports should exceedimports.
Bullionism: belief that the economic
health of a nation was measured by theamount of precious metals ( gold &silver) it possessed.
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MERCANTILISM
Colonialism: colonies were viewed assources of raw materials.
Heavy govt. control of trade, with thegoals of trade being goals ofgovernments.
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MERCANTILISM: CRITICISM
It viewed trade as a zero sum game.
It measured wealth of a nation by stock ofprecious metals, today we measure wealth by
a nations stock of human , man-made andnatural resources, available.
Govt. resort to subsidizing exports and puttingrestrictions on imports to build surplus.
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Theory of Absolute Advantage
Producing a good with fewer , labor,land, raw material etc.) per unit ofoutput than other countries
If input prices are the same in twocountries, the country with an absoluteadvantage in a good will have a lowerunit cost of production for that good.
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Theory of Absolute Advantage
ADAM SMITH, The Wealth ofNations, 1776.
A country should produce and export
products in which it has an absoluteadvantage.
A country should import products in
which it has an absolute disadvantage.Theory viewed trade as a positive sum
game.
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..contd.
ASSUMPTIONS
i. It is assumed that countries are driven onlyby maximisation of production &
consumption.ii. The theories assumed that there are onlytwo countries engaged in the production &consumption of just to goods.
iii. It is assumed that there are notransportation costs for shipping goods fromone country to another.
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..contd.
The 2 theories consider that labor is the onlyfactor of production that helps convert rawmaterial into finished goods.
It was also assumed that labor was immobile. It is assumed that specialization in the
production of one particular good does notresult in increased efficiency.
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Theory of Absolute Advantage
Spain has absoluteadvantage inproduction of olive oil.
Italy has absoluteadvantage inproduction of shoes.
Thus Spain shouldexport olive oil andimport shoes.
Italy should export
shoes and import oil.
Country Olive Oil Shoes
Spain 2 4
Italy 4 2
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Theory of Absolute Advantage
How could Spain enjoy absoluteadvantage in production of olive oil?
How could Italy enjoy absolute advantage
over production of shoes? CLIMATIC CONDITIONS
SKILLED LABOR
DEPOSITS OF NATURAL RESOURCES
What if one of the trading partners has anabsolute advantage in the production ofboth goods, namely oil and shoes?
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Theory of Absolute Advantage
What about a country (like the U.S.) thathas an absolute advantage in mostproducts?
How can it possibly produce enough ofeverything to satisfy the whole world?
As production increased, competition for
scarce inputs drive up production costs,taking away many absolute advantages.
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Theory of Absolute Advantage
What about a country (Like Nepal) thathas an absolute disadvantage in nearlyall products?
Why should its resources sit aroundunused?
As production falls, prices of inputs would
fall, lowering production costs & creatingsome absolute advantages.
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Theory of Comparative Advantage
Producing a good at a lower opportunitycost than another country.
Inputs used in the production of onegood aren't available for theproduction of other goods.
When a country produces a good,
what does it give up in foregoneproduction of other goods?
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Theory of Comparative Advantage
David Ricardo, The Principles of
political Economy and Taxation, 1817.
A country should produce & exportproducts in which it has a comparativeadvantage.
A country should import products in
which it has a comparativedisadvantage.
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Theory of Comparative Advantage
Country No. of units oflabor per unit of
cloth
No. of unitsof labor perunit of wine
Exchangeratio between
wine andcloth
ENGLAND 100 120 1 wine=1.2cloth
PORTUGAL 90 80 1 wine=0.88cloth
One Input (Labor)2 goods (Cloth, Wine)2 Countries (England , Portugal)
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Country Olive Oil Shoes
Spain 1 2
Italy 6 3
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Theory of Comparative Advantage
Opportunity Cost : The cost of pursuing oneactivity in terms of the foregone return on thenext-best alternative activity.
EXAMPLES: The opportunity cost of going tocollege is what you could have earnedworking full-time instead.
The opportunity cost of using a plant to
manufacture one product is what thecompany could have earned manufacturinganother product at the plant instead.
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.contd.
Even a country at an absolute disadvantage ineverything will have a comparative advantage insomething.
Each country specializes in the production &export of what it does relatively well.
Prices of goods & inputs in a free-marketeconomy will adjust in order to lead to this
outcome. Countries rely on imports to meet consumer
demands for goods in which they dont have acomparative advantage.
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.contd.
Advantages:
A country can achieve consumption levelsbeyond what it could achieve on its own.
Govt. policy can alter free-market outcomes (import tariffs, import quotas, export subsidies,etc.)
Efficient allocation of global resources.
Maximization of global production at the leastpossible cost.
Product prices become more or less equalamong world markets.
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Modern theories of trade
International PLC
National competitive Advantage.
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Firm Specific Theories
Trade theories discussed till now havetrade between countries as mainfocus.
Now the focus is shifting from firmcentricism to firm specificity orcountry centrisim.
SinceMNCs
are dominating IB & aresetting agenda for direction ncomposition of world trade.
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International PLC
International PLC ( RaymondVernon,1966)
Competitive advantage first resides in the
lead innovation nation, which exports toother nations.
Production migrates to other advanced
nations & then developing nations indifferent PLC stages.
First theory to incorporate dynamic changesin patterns of trade. More realistic with trade
in industrial products in 20th century.
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International PLC
Theory identified 3 stages in thelifecycle of a product.
i. New Product Stage
ii. Maturing Product Stage
iii. Standardized product Stage
This approach can be applied to avariety of products.
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International PLC
U.S. and other developing nations maynot always be the lead innovators.
Many new products are now launchedsimultaneously around the world.
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National Competitive Advantage of
Industries- Porters diamond theory
Porter,1990, Studied 100 companies in 10developed countries to learn how a firm canbecome competitive.
A company which enjoys competitiveadvantage is in a stronger position to tradewith firms in other countries.
A firms competitive advantage stems from FACTOR CONDITIONS DEMAND CONDITIONS
RELATED AND SUPPORTING INDUSTRIES
FIRM STRATEGY, STRUCTURE AND RIVALRY
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National Competitive Advantage of
Industries
Demand Conditions
Factor Conditions
Related and SupportingIndustries
Strategy & Rivalry
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National Competitive Advantage of
Industries
1. FACTOR CONDITIONS: include land, labor, natural resources and infrastructure.
Sustained competitive advantage comes
from advanced or specialized factors likeskilled labor, capital and infrastructure.
These are created not just inherited.
2. DEMAND CONDITIONS: includes sizeand sophistication of its market .
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National Competitive Advantage of
Industries
3. RELATED & SUPPORTING INDUSTRIES:these enhance competitive advantage thruworking relationships, joint research andproblem solving, close proximity and sharing of
knowledge and experience.
4. FIRM STRATEGY, STRUCTURE & RIVALRY:Vigorous domestic competition compels the firmto become vibrant n proactive. Structure refers tomgmt. style being practiced by the firm.National policiestend to affect the firmsinternational strategies.
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contd.
Along with 4 elements in the diamond, Porter brings 2more elements : role of govt. and role of chancethat contribute to a firms competitiveness.
Limitations:
Focus more on developed countries.
Natural resources are too important.
Govt. has a role in determining competitiveness.
Chance factors play their role in promoting or
hampering competitive strengths of firms.
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Trade theories: Critique
ASSIGNMENT